Fran on tax

Fran O’Sullivan sees the significance of the Reserve Bank announcement:

… the central bank has also issued forecasts that predict a more negative economic outlook than the Treasury forecasts on which Cullen justified the size of his tax cuts.

This gives National the necessary political cover to argue a more serious tax-cutting programme would simply provide the necessarily larger fiscal stimulus to offset the more negative outlook without tempting the inflationary dogs.

Exactly.

However I would sound one note of caution. While the Reserve Bank forecasts indicate further tax cuts are possible without pushing interest rates up, there is still a potential fiscal problem. The weaker economy could turn Dr Cullen’s wafer thin surrpluses into deficits and further tax cuts without some reduction in expenditure would be a concern. One can go into deficit for short periods of time, one needs to make sure any deficit is not structural, if you have one at all.

It’s pretty basic politics. But the debate needs to move on to a higher plane. If National leader John Key retains the courage of his convictions – a quality that eluded his predecessor Don Brash – he should go further and reclaim lower taxes as the necessary element in building an internationally competitive economy. Not simply some version of tax-relief or middle-class welfare only dished out when the economy is in the soup.

This is the key point. Tax cuts should not be seen as just a different form of welfare. Splitting up the same sized cake is not going to solve our problems – it is growing the cake.

There is no real doubt that a smaller state as a percentage of GDP, leads to higher economic growth. The empirical evidence for this is massive and over many decades in many countries.

However of course there is a trade off as to the ability of the state to fund various services. That is why you don’t have the state at 5% of GDP. Getting the balance right if the challenge.

Key is a natural tax-cutter – by heart a fan of the Irish model of using low tax rates to attract foreign direct investment. Particularly for greenfields investments where the investors get a lower tax rate for investing in new enterprises that provide more jobs for our skilled people.

With unemployment forecast to rise substantially over the next few years, a serious programme based on competitive company taxes could provide another counter-cyclical stimulus. Particularly if National devised some mechanisms for foreign investors to take advantage of New Zealand’s China free trade agreement.

The luddites are against foreign investment, but they really need to look at Ireland to recognise what it can do in terms of increasing jobs and economic growth.